U.S. yield curve most inverted in 15 years

The 2-year to 10-year yield spread of minus 8.7 basis points means the yield curve is at its most inverted since the spring of 2007, signalling investor fears of an economic downturn.

The mood was also cautious ahead of U.S. June inflation data due on Wednesday, a report which will impact the pace of Federal Reserve interest rate rises.

“The U.S. 10-year yield dropped back below 3% after rallying above following Friday’s stronger than expected jobs report,” said the strategy team at Saxo Bank. “This despite expectations that Wednesday’s U.S. CPI print may edge closer to 9%, thereby supporting the Federal Reserve’s case for another jumbo rate hike at the July 27 meeting.”

Markets are pricing in a 91% probability that the Fed will raise its benchmark interest rate by another 75 basis points to a range of 2.25% to 2.5% after its meeting on July 27. The central bank is expected to take its base rate to 3.5% by April 2023, according to Fed Funds futures.

“Broad concerns on growth risk across developed markets and increased probability of U.S. recession have driven a sharp repricing of monetary policy expectations…with markets now questioning the speed and the length of the tightening cycle. Market depth remains poor with historical volatility close to record high,” said JPMorgan global rates strategists.

The MOVE index, a measure of anticipated Treasury market volatility, was trading at 148, up 76% year to date.

In Europe, similar dynamics were at play. The yield on 10-year German bunds
TMBMKDE-10Y,
1.129%
fell 13 basis points to 1.116% after the ZEW survey of business confidence plunged to minus 53.8 compared to forecasts for minus 38.3. Sentiment in the country has been hit by fears Russia will continue to restrict energy supplies.